Automotive

Lease vs. buy/financing analysis and incredible confusion

  • Last Updated:
  • Mar 22nd, 2018 2:44 pm
[OP]
Jr. Member
Jun 6, 2011
158 posts
126 upvotes
Ottawa

Lease vs. buy/financing analysis and incredible confusion

I’ve been thinking a lot about this and seem to be going back and forth on what’s best financially.

I’m on my second lease but looking to get it taken over because I need a bigger car (van or SUV). Once I’m out of that contract I’m open to all options and was certain for a while that I’d buy/finance because it’s just like leasing (paying monthly) but at the end of the financing you own a car you can sell for cash. So the plan was to finance a new car, own it until before its first major ($2000+) required maintenance, and sell it to buy a new car with. That way, I get the benefit of a lease (stable month payments and no large cash down payment) but also a car to sell off when it becomes too expensive to keep because of age.

This made sense until I remembered how much cars depreciate in the first second off the lot. So why I’m now thinking this is a bad idea is I’ll be the guy swallowing the initial depreciation every time I buy new. I buy a new car and get it financed for the full ticket amount. I drive it off the lot and can now only sell it for at least $2-5K less than new as it’s now a used car. I own it for a few years until I want to get rid of it, say in 5 years. I will not be able to sell it for amount left on the financing because it’s value has depreciated from the principle amount over time. So I’ll still have to fork over my own cash to zero out the balance owing on the financing. I could do this pre-emptively and put a down payment down but that’s still me shelling over a few thousand cash.

So now I’m back to thinking leasing is the best financial method to have access to a car. I put nothing down, I pay a predictable monthly amount, and get a new car every 5 years. (Apologies to any environmentally-focused folks; I know this is the worst thing you can do in terms of footprint, but I can’t afford to be green at the moment). The benefit of buying is being able to sell the car to pay off the financing eventually but considering depreciation I don’t see how I would not have to fork out additional money beyond the monthly payments.

Just for an example:

I currently lease an Elantra for about $250 bucks a month. Besides maintenance, I don’t have any other costs. And I return the car in 5 years, hopefully without spending too much money on large maintenance work. I might need to pay for new tires at the end of the lease but hopefully no other damage or wear and tear costs. I lease a new Elantra, and pay about the same again for 5 years. Rinse and repeat forever.

($250 x 60 months = $15000 every 5 years)

OR

I buy a new Elantra and get it financed for the lowest monthly amount possible since I don’t plan on ever paying the plan off entirely. I look to sell the car in 5 years while it’s still got a good resale value. But I will not get principle minus the portion paid off through monthly payments with which I can pay off the rest of the financing because the used car on the open market will not be worth that much. So let’s say I get 75% of the amount in a sale, I still need to come up with 25% to pay off the financing. So there’s a need for me to spend beyond the monthly amount I pay. And this isn’t even thinking about interest rates and the fact that monthly payments are usually bigger on financing than a lease.

(I just checked the Hyundai website and they're offering 0% interest for 60 months financing so the comparative math is relatively easy: $373 x 60 months = $22400 and I own the car after 5 years which is worth about $8000. That would be great and probably the best case scenario but I can't afford those monthly payments so I'll increase the term to 96 months at 1.99% to get $250 a month. Now I want to sell after 5 years and get about $8000. I've paid off $15000 and still owe $7400. Oh... so I have almost enough to pretty much pay off the financing. So I'm clear. Huh.. didn't expect that. It's good to do the math sometimes lol. BUT I'm back to zero and now have to do this all over again... so really it's a lot more headache (selling a car privately) for what seems like the same result as leasing which is having a car for 5 years at a cost of $15000.)

Guys, my brain is fried. What's the best move here?
20 replies
Deal Addict
Aug 20, 2007
1863 posts
624 upvotes
Kitchener
Considering your situation it sounds like buying in cash for a semi-new car is not an option for you. Your also not doing the benefits analysis with a long enough horizon

There is nothing wrong with leasing, some people like it and enjoy flipping from car to car every 3-5 years and they pay a slight premium for the privilege of doing. Personally though in your situation if I would recommend the following:

1) Purchase a new car that you can afford, finance it and have it paid off in 60 months. $373*60= 22400
2) Once the 60 months is up, take the 373/month you've been paying and put it into a HISA and bank it. Continue to drive the car for 60 months, saving 4476/yr
3) Assuming that yearly you will spend about an avger of 1000 a year on maintence/repairs. This assumes things like oil changes, repairs, new brakes, tires. Obviously the latter tires and brakes don't happen yearly but some years you'll have a repair and new tires that could exceed $1000 and other years all you had to do was 3 oil changes for example. This leaves you approx. 3400 net in your account per year.
4) At month 120 you decided to sell your car for 10% of the purchase price, ie 2240 and buy something different. You now have the following cash at hand, $2240(proceeds from car sale), $17380 (yearly net savings $3476*5 years) for a grand total of 19620.

There fore your net cost could be viewed as the following $22400-19620= 2780 for the 10 years of owning that car compared to if you leased leased the car, you would have been out, $15000+$15000=$30000. Big difference and remember, this includes an assumption of spending $1000/year on repairs/maintenance, etc!

There is nothing wrong with leasing, is a personal preference and for each person to decide. But if you have self control to save the car payment once you have finished financing the car, you can set your self up for a nice savings amount for your next car!
Deal Addict
Jan 15, 2017
2638 posts
1954 upvotes
As vehicles are depreciating, the only way you can ahead of the depreciation when you finance a vehicle is to bring money to the table in the form of a large down payment and/or higher payments. That's how people create equity in a depreciating asset - you need to actually put your own money into it.
Deal Addict
Jan 8, 2007
2354 posts
854 upvotes
Calgary
polish_jr333 wrote:
Mar 21st, 2018 12:33 pm
I’ve been thinking a lot about this and seem to be going back and forth on what’s best financially.

I’m on my second lease but looking to get it taken over because I need a bigger car (van or SUV). Once I’m out of that contract I’m open to all options and was certain for a while that I’d buy/finance because it’s just like leasing (paying monthly) but at the end of the financing you own a car you can sell for cash. So the plan was to finance a new car, own it until before its first major ($2000+) required maintenance, and sell it to buy a new car with. That way, I get the benefit of a lease (stable month payments and no large cash down payment) but also a car to sell off when it becomes too expensive to keep because of age.

This made sense until I remembered how much cars depreciate in the first second off the lot. So why I’m now thinking this is a bad idea is I’ll be the guy swallowing the initial depreciation every time I buy new. I buy a new car and get it financed for the full ticket amount. I drive it off the lot and can now only sell it for at least $2-5K less than new as it’s now a used car. I own it for a few years until I want to get rid of it, say in 5 years. I will not be able to sell it for amount left on the financing because it’s value has depreciated from the principle amount over time. So I’ll still have to fork over my own cash to zero out the balance owing on the financing. I could do this pre-emptively and put a down payment down but that’s still me shelling over a few thousand cash.

So now I’m back to thinking leasing is the best financial method to have access to a car. I put nothing down, I pay a predictable monthly amount, and get a new car every 5 years. (Apologies to any environmentally-focused folks; I know this is the worst thing you can do in terms of footprint, but I can’t afford to be green at the moment). The benefit of buying is being able to sell the car to pay off the financing eventually but considering depreciation I don’t see how I would not have to fork out additional money beyond the monthly payments.

Just for an example:

I currently lease an Elantra for about $250 bucks a month. Besides maintenance, I don’t have any other costs. And I return the car in 5 years, hopefully without spending too much money on large maintenance work. I might need to pay for new tires at the end of the lease but hopefully no other damage or wear and tear costs. I lease a new Elantra, and pay about the same again for 5 years. Rinse and repeat forever.

($250 x 60 months = $15000 every 5 years)

OR

I buy a new Elantra and get it financed for the lowest monthly amount possible since I don’t plan on ever paying the plan off entirely. I look to sell the car in 5 years while it’s still got a good resale value. But I will not get principle minus the portion paid off through monthly payments with which I can pay off the rest of the financing because the used car on the open market will not be worth that much. So let’s say I get 75% of the amount in a sale, I still need to come up with 25% to pay off the financing. So there’s a need for me to spend beyond the monthly amount I pay. And this isn’t even thinking about interest rates and the fact that monthly payments are usually bigger on financing than a lease.

(I just checked the Hyundai website and they're offering 0% interest for 60 months financing so the comparative math is relatively easy: $373 x 60 months = $22400 and I own the car after 5 years which is worth about $8000. That would be great and probably the best case scenario but I can't afford those monthly payments so I'll increase the term to 96 months at 1.99% to get $250 a month. Now I want to sell after 5 years and get about $8000. I've paid off $15000 and still owe $7400. Oh... so I have almost enough to pretty much pay off the financing. So I'm clear. Huh.. didn't expect that. It's good to do the math sometimes lol. BUT I'm back to zero and now have to do this all over again... so really it's a lot more headache (selling a car privately) for what seems like the same result as leasing which is having a car for 5 years at a cost of $15000.)

Guys, my brain is fried. What's the best move here?
The absolute best way for you is the lease. You're saying you want to sell a car after 5 years anyways before it's paid off. So why would you finance it? If you want to pay off the car and keep it 10 years I would say finance. But, if you know you will want to sell it after 5 years, just lease it. By the way, you can also sell a leased car just like you plan to sell your financed car that's not paid off. In both cases you just pay the car off first and sell it.
[OP]
Jr. Member
Jun 6, 2011
158 posts
126 upvotes
Ottawa
Thanks guys.

Skeet50, I'd get that in terms of investing in my house. I put in money to upgrade the house and hope to see a multiplier on those sunk costs at the time that I'm selling the house. I just don't see how transferring cash into a car can be beneficial.

peelhic, I never thought of it that way. Paying it off and then continuing to save that cash. I guess I'm just scared of keeping a car past 5-6 years because I drive cheaper cars (couldn't care less about marketing and how a car is supposed to make me feel or inform others of my personality lol) so owning and maintaining a 6 year old Elantra just sounds problem-prone. Maybe if it was a Volvo or Subaru I'd change my thinking. Your math does check out though and that would be considerable savings compared to the $30K over 10 years in leasing. BUT, my method of budgeting is month to month and I just couldn't see the $373/month working right now. Plus, in terms of opportunity costs, I can't touch the $373 for up to ten years whereas continuing to lease at $250 a month frees up $123 every month for other expenses. Sigh, I'm starting to see I'm trying to convincingly justify my methods here. Thanks for the input!

Aleks, thanks for that! I totally didn't know that was an option. I thought there were penalties that would make it too costly. Could that be the case? There must be some reason there are so many lease takeover options. Especially ones where people are offering cash incentives to take their car lease over. Why would they be offering cash if they could easily take out a loan or LOC to buy the lease out and then sell the car to repay the loan?
Deal Addict
Jan 8, 2007
2354 posts
854 upvotes
Calgary
polish_jr333 wrote:
Mar 22nd, 2018 9:20 am
Thanks guys.


Aleks, thanks for that! I totally didn't know that was an option. I thought there were penalties that would make it too costly. Could that be the case? There must be some reason there are so many lease takeover options. Especially ones where people are offering cash incentives to take their car lease over. Why would they be offering cash if they could easily take out a loan or LOC to buy the lease out and then sell the car to repay the loan?
I would say there are a few factors. First some people don't know they have the option. Others can't be bothered to take out a loan, pay for the car, post it for sale, deal with kijiji crowds etc. It's a lot more work. A lot of cars aren't ideal lease candidates and have either poor rates, poor residuals or aren't very sought after on the used market. Every car is different and to sell a leased car all you need to do is find out what your current payout is, go to your dealer and pay that amount plus an admin fee (this varies from $0 to $2,000 for luxury brands). There are no other penalties, no tricks.

The issue is, you can have a huge variation on how much equity you have in a lease. It depends on the car and how long your have had it. If your payout is $8,000 for example and you can only sell your car for $6,500 privately that's negative equity that costs you. You can be in a reverse position and have $1,500 of positive equity for example. In my experience I've seen anywhere from $500 to over $7,000 in positive equity on my leases I've sold.
Deal Addict
Aug 20, 2007
1863 posts
624 upvotes
Kitchener
polish_jr333 wrote:
Mar 22nd, 2018 9:20 am
Thanks guys.

Skeet50, I'd get that in terms of investing in my house. I put in money to upgrade the house and hope to see a multiplier on those sunk costs at the time that I'm selling the house. I just don't see how transferring cash into a car can be beneficial.

peelhic, I never thought of it that way. Paying it off and then continuing to save that cash. I guess I'm just scared of keeping a car past 5-6 years because I drive cheaper cars (couldn't care less about marketing and how a car is supposed to make me feel or inform others of my personality lol) so owning and maintaining a 6 year old Elantra just sounds problem-prone. Maybe if it was a Volvo or Subaru I'd change my thinking. Your math does check out though and that would be considerable savings compared to the $30K over 10 years in leasing. BUT, my method of budgeting is month to month and I just couldn't see the $373/month working right now. Plus, in terms of opportunity costs, I can't touch the $373 for up to ten years whereas continuing to lease at $250 a month frees up $123 every month for other expenses. Sigh, I'm starting to see I'm trying to convincingly justify my methods here. Thanks for the input!

Aleks, thanks for that! I totally didn't know that was an option. I thought there were penalties that would make it too costly. Could that be the case? There must be some reason there are so many lease takeover options. Especially ones where people are offering cash incentives to take their car lease over. Why would they be offering cash if they could easily take out a loan or LOC to buy the lease out and then sell the car to repay the loan?
Not sure how many cars you've owned but entry level cars do not have a significantly different chance of repairs compared to higher end brands. If your making your decisions based on this assumption its not valid. Also, so you would rather give someone 250 a month and keep 123 for yourself or keep 373 a month all to yourself? WTF? In the end the benefit of keeping the car past 5 years is that you can drive it payment free... you don't have to save the payments after this point, heck spend it all... but the financial prudent thing would be to save it and put it towards something, either a new car or RRSP, etc.
Deal Addict
Nov 8, 2005
2069 posts
600 upvotes
People say there is nothing wrong with leasing but remember that when you lease you're paying for the depreciation of the vehicle as well as when financing, and then some. The lender decides what the value of the vehicle is after the lease term is over. However yes if your plan is to always have a car payment then leasing is probably the best. Financing is more financially responsible when you plan to keep the car well past the end of the financing. For example, if you lease a vehicle for $500 a month then at the end of 10 years you will have paid $60k.

If you finance the car and pay it off in 7 years but you own it for 10, then you can take the total amount you paid for the car over the course of however many years you financed it for, and spread it out among the total time you owned it. You'll find that owning a financed car is generally cheaper.

You pay a premium for flipping your car when leasing, but you generally also enjoy a maintenance free vehicle since there are rarely any issues in the first few years.
[OP]
Jr. Member
Jun 6, 2011
158 posts
126 upvotes
Ottawa
peelhic wrote:
Mar 22nd, 2018 10:47 am
, so you would rather give someone 250 a month and keep 123 for yourself or keep 373 a month all to yourself? WTF? In the end the benefit of keeping the car past 5 years is that you can drive it payment free... you don't have to save the payments after this point, heck spend it all... but the financial prudent thing would be to save it and put it towards something, either a new car or RRSP, etc.
Well hold on now, the $373 amounts to $22400 after fiver years and only then does that #373 free up. But I'd have to save some of it prudently to have money on hand as maintenance and repair costs start rising over the next 5 years of the car's life. I guess what I'm saying is I get paid monthly, my mortgage and all other payments are monthly. I get used to budgeting monthly so the stability of lease payments is more manageable for me than having the shock of having to come up with potentially 1000s of dollars in one month for repairs. You all make a lot of sense, though.
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Sep 9, 2012
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polish_jr333 wrote:
Mar 22nd, 2018 11:10 am
Well hold on now, the $373 amounts to $22400 after fiver years and only then does that #373 free up. But I'd have to save some of it prudently to have money on hand as maintenance and repair costs start rising over the next 5 years of the car's life. I guess what I'm saying is I get paid monthly, my mortgage and all other payments are monthly. I get used to budgeting monthly so the stability of lease payments is more manageable for me than having the shock of having to come up with potentially 1000s of dollars in one month for repairs. You all make a lot of sense, though.
Sounds like you need to have an emergency fund on hand. Never mind car repairs popping up to ruin your budget, same can happen with home repairs.

If you had an emergency fund then you’d be able to access cash to make the repairs instead of having a budgetary crisis.

Also, in my opinion, depreciation is irrelevant on a lease vs loan analysis. In both scenarios you start at the same MSRP or negotiated deals. In both cases it’s still going to depreciate the same and have the same value in 4 yrs.

So yes, if you get a loan and own it then you’re eating the depreciation in the new car. This seems obvious. For the lease though, you don’t feel it the same way but the lease payments sum up to the same depreciated value + interest. So either way, you’re paying for the depreciation and financing costs.

The decision is better made by focusing just on the intangibles:

- do you want the security of only driving vehicles while under warranty? Lease.

- do you want less hassle at trade in time? Lease.

- do you want a lower monthly payment? Lease.

- do you want to better control the timing of when to get another vehicle? Buy/Loan.

- do you want to enjoy some periods where you have no car payments? Buy/Loan.

- do you want to reduce interest costs? Buy/Loan (assuming same rate/term a loan’s interest costs are lower than a lease’s interest costs)
Deal Expert
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Nov 15, 2004
17800 posts
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What kind of return can you get on the cash difference of your lease payments and hypothetical loan payments?

If the $123/month you'd save going with leasing instead of financing would be put to use on something like paying down high interest debt or investing into something that yields a good return then it's better to lease than to buy. If you have no other need for the money, are going to keep the car until it dies, and are okay with putting up a large amount of cash up front then financing is the better option, but if you need cash now for other things then you're better off leasing.

Mortgage interest isn't tax deductible in Canada, so you may be better off putting the improved cash flow from leasing into paying down your mortgage quicker while rates are low right now to save yourself from higher interest payments in the future when rates rise.
Could HAVE, not could OF. What does 'could of' even mean?
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Jul 22, 2006
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Why would you lease a Hyundai which has bad residual value........
Deal Addict
Aug 20, 2007
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Kitchener
My comment was with relation to having the extra cash flow after the car is paid off vs still leasing a new one. Plus if the difference between$ 250 and $373 is a main driver in your decision today, ie you can't afford the extra $123 right now, then you shouldn't be leasing a car for $250/month if your budget is so tight.
Deal Addict
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Dec 21, 2013
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Good god and I thought I overthought things.

You are going to pay more for a lease but lets be honest - this is a Hyundai and the implied savings are minimal especially when you factor in the time value of money.

If stability of payments and minimal variance is your main desire - lease.
If you can deal with the nuances of selling a car and want to save a few dollars - finance.

If you consider paying yourself for your time (esp. when selling a car), they both cost the same... arguably the lease would be cheaper!

Have a healthy emergency fund regardless.
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Jun 19, 2001
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If your goal is to pay less overall, you should buy the elentra slightly used http://www.mycar.ca/used/hf/mycarkingst ... 550690.htm , and keep it indefintiely. Your permanent lease payments would pay for an awful lot of maintenance! Rolling over leases cosntantly is not the way to save money

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